Life Insurance 101 Explained
Are you in the market for life insurance? Are you unsure of how to find the best plan for your needs? Here is a simple, concise guide that will tell you all about what life insurance is and how it can help you. We'll go over the different types of plans, coverage levels, special features, and more. Let's jump right into it!
What is Life Insurance?
Life insurance provides benefits to survivors of a death in exchange for premiums paid by policyholders. Basically, if someone dies during the term of their policy then their family will receive a payout from an insurer. The amount of that payout is generally dependent on the type of insurance policy that is in place.
Plans are available with varying levels of coverage, from very minimal to very comprehensive. A Basic Life or Term Life policy pays out the balance of a death benefit if the life insured dies while the policy is in effect, but usually does not pay out for additional coverage beyond that. A Whole Life or Universal Life policy, on the other hand, pays out only once at its conclusion and can be quite expensive.
There are also Variable Life policies that offer a great deal of flexibility. These policies allow you to choose how to invest premiums paid into the policy, and may provide additional features such as an interest-bearing savings account component. We'll discuss all of these in greater detail later on.
Do I Need Life Insurance?
Life insurance tends to be very important for those with dependents (spouses, children). It can be used as a way to ensure that said dependents will be able to pay for life's basic necessities should the policy holder die before they do.
But do you need life insurance? One test you can use is determining whether or not your death would leave anyone penniless or without a home or car. If the answer is "yes," then it's highly likely that life insurance is a good idea.
What to look for in a plan? Certain kinds of life insurance can be useful in different situations. Here are some things you should look for:
Payment schedule: You don't want to pay more in premiums than you need to (you might not even get the policy paid out at all). Conversely, you don't want to be paying more than necessary (if your income was higher than the amount of insurance on your policy, then more money could be taken out by a beneficiary). Life insurance can be expensive, so it's handy to have options and know what each will cost.
If you have dependents, you need to know just how much will be paid out in the event of your death. A policy that has low coverage costs but pays little on death may be a waste of money. On the other hand, more expensive policies may seem like a better value if they pay out considerably more in the case of death. If you're paying premiums for life insurance for a child into their 40s and 50s (at which point they are likely independent) then it probably isn't worth it unless it's extremely inexpensive.
For those who are self-employed or small business owners, business owner's policies (BOPs) may be preferable. These policies cover you and your business against several potential liability risks.
Also consider term vs. whole life. Whole life plans typically cost more because they can have savings accounts attached that provide interest income over time, but some people may not want to tie up that money in a savings account.
Policy clauses: Most policies will come with limitations regarding pre-existing conditions or other medical issues that may exclude you from coverage (usually these are related to heart attacks, strokes, cancer, etc.). If this is an issue for you or a family member then it's important to know when the policy will pay out and for how much (many policies will only pay out up to a certain amount or until a certain age). Of course, there are many policies that don't have any medical exclusions so you're not at a disadvantage by getting a plan that doesn't have these.
Policy features: These include things such as cash-value life insurance (you can add cash to the policy to increase its benefit), group term life insurance plans, and more. Some of these can be very expensive while others offer significant value. You may want to consider which features are most important for you and find the best possible combination to fit your needs.
What to look for in a company? It can be useful to do some research on the reputation of a life insurance company before you buy a policy. Are they known in your area as being trustworthy and honest? If so, then they may be worth buying from. You should also ask for information about what kinds of policies they cover and their benefits. You don't want any surprises; make sure you know exactly what coverage is in place.
What is Term Life Insurance?
Term life insurance provides protection against death during the term of a policy, at which point the sum total of all payments made by the policy (both fixed and variable) will be passed on to beneficiaries. These policies are typically the cheapest and most basic, and can be used to fill in gaps in coverage for those with existing plan's.
What is Universal Life Insurance?
Universal life insurance provides protection against death during the term of a policy, at which point the sum total of all payments made by the policy (both fixed and variable) will be passed on to beneficiaries. These policies are typically more expensive than term plans, but provide a savings component where you can add funds to increase your coverage over time. The savings component may also come with a tax-deferred interest component if you choose.
What is Whole Life Insurance?
Whole life insurance provides protection against death during the term of a policy, at which point the sum total of all payments made by the policy (both fixed and variable) will be passed on to beneficiaries. These policies are typically more expensive than term plans, but provide a savings component where you can add funds to increase your coverage over time. The savings component may also come with a tax-deferred interest component if you choose.
What is Variable Life Insurance?
Variable life insurance provides protection against death during the term of a policy, at which point the sum total of all payments made by the policy (both fixed and variable) will be passed on to beneficiaries.
Conclusion
Life insurance is not a bad deal if you have dependents or obligations. While it's always possible to do without it, the costs of doing so could be very high. Some people are willing to take that risk while others aren't — as with most things in life, it's up to you to decide whether or not you think the benefits outweigh the costs. If you do decide a policy is right for you, make sure you're getting the most for your money and keep close track of payments and policy changes to make sure they are in line with your intentions.